SECURED TRANSACTIONS LAW Flashcards
Governing Law
Rule Statement:
Article 9 of the UCC governs secured transactions.
To help memorize this important point, consider the following techniques:
Mnemonic: “A9ST” (Article 9, Secured Transactions)
Visualization: Picture a large number 9 with a padlock (representing security) attached to it, surrounded by various types of property (representing the wide range of transactions covered).
Rhyme: “When security’s the game, Article 9 is the name.”
Key points to remember:
Article 9 is a specific part of the Uniform Commercial Code (UCC).
It specifically deals with secured transactions.
This is a fundamental concept in commercial law.
Common ways this might be tested:
Direct questions about which part of the UCC governs secured transactions.
Questions about whether a particular transaction falls under Article 9.
Fact patterns involving secured transactions where you need to identify the governing law.
Common mistakes to avoid:
Confusing Article 9 with other articles of the UCC.
Assuming all commercial transactions are governed by Article 9.
Forgetting that state variations of the UCC may exist.
To reinforce your memory:
Create a flashcard with “Article 9 UCC” on one side and “Secured Transactions” on the other.
Practice explaining what Article 9 covers to someone else.
Review examples of secured transactions and identify how Article 9 applies to them.
This rule is fundamental to understanding secured transactions in commercial law. It’s often the starting point for analyzing any issues related to security interests in personal property.
Creating Security Interests
SEA
Rule Statement:
A security interest becomes enforceable upon attachment.
To help memorize this important point, consider the following techniques:
Mnemonic: “SEA” (Security interest Enforceable upon Attachment)
Visualization: Picture a security guard (representing the security interest) attaching a document to a wall, which suddenly lights up (representing enforceability).
Rhyme: “When attachment’s in sight, the security interest gains its might.”
Key points to remember:
Attachment is a crucial step in creating a security interest.
Enforceability is directly linked to attachment.
Without attachment, a security interest is not enforceable.
Common ways this might be tested:
Questions about when a security interest becomes enforceable.
Fact patterns where you need to determine if a security interest is enforceable.
Questions distinguishing between attachment and other steps in creating a security interest (like perfection).
Common mistakes to avoid:
Confusing attachment with perfection.
Assuming a security interest is enforceable as soon as it’s agreed upon.
Forgetting that enforceability and priority are separate concepts.
To reinforce your memory:
Create a flowchart showing the steps from creating a security interest to enforceability, with attachment as the key step.
Practice explaining the relationship between attachment and enforceability to someone else.
Review examples of security interests and identify the point at which they become enforceable.
This rule is fundamental to understanding how security interests work. It emphasizes that merely agreeing to create a security interest is not enough; specific conditions (attachment) must be met for the interest to be enforceable.
Attachment
4A2OC
CMEV2D
DMHRIC
MB1OF
AR OR SA
SPHPOC
CSIRF + SCD2SP OR
SPHCOECPIP OR LOCR
VRCPASC
Rule Statement:
For attachment to occur:
(1) the creditor must extend value to the debtor,
(2) the debtor must have rights in the collateral, and
(3) there must be one of the following:
(a) an authenticated record or security agreement;
(b) the secured party has possession of the collateral;
(c) certificated security in registered form plus security certificate delivered to the secured party; or
(d) the secured party has control over electronic chattel paper, investment property, or letter-of-credit rights.
To help memorize this important point, consider the following techniques:
Mnemonic: “VRCPASC” (Value, Rights, Contract/Possession/Authentication/Security/Control)
Visualization: Picture a lock (representing attachment) with three keyholes. The first key is labeled “V” (value), the second “R” (rights), and the third has four prongs labeled “C” (contract), “P” (possession), “A” (authentication), and “S” (security/control).
Rhyme: “Value given, rights in hand, then contract, possess, or command. Authenticate, secure, control, these are ways attachment takes its toll.”
Key points to remember:
Three main conditions for attachment.
Multiple options for the third condition.
Different rules for different types of collateral.
Common ways this might be tested:
Fact patterns where you need to determine if attachment has occurred.
Questions about which conditions are necessary for attachment.
Scenarios involving different types of collateral and how attachment occurs for each.
Common mistakes to avoid:
Forgetting any of the three main conditions.
Assuming all types of collateral require the same method of attachment.
Confusing the requirements for attachment with those for perfection.
To reinforce your memory:
Create a flowchart showing the three main conditions and the options for the third condition.
Practice explaining the requirements for attachment to someone else, using examples for each type of collateral.
Review sample security agreements and identify how they meet the attachment requirements.
This rule is crucial for understanding how security interests are created. It emphasizes that attachment requires not just agreement, but also specific actions and conditions. The variety of options for the third condition reflects the diverse types of collateral that can be subject to security interests.
Perfection
2PSICM
FFSWSOSTIC&SI OR
TPOCOC
FSOPC
Rule Statement:
To perfect its security interest, a creditor must:
a) file a financing statement with the secretary of state that identifies the collateral and security interest, or
b) take possession or control of the collateral.
To help memorize this important point, consider the following techniques:
Mnemonic: “FSPC” (File Statement or Possess/Control)
Visualization: Picture a large file cabinet (representing the secretary of state’s office) with a document being inserted (the financing statement), and next to it, a person holding various objects (representing possession or control of collateral).
Rhyme: “File with state to demonstrate, or possess and control to elevate. These are ways to perfect your claim, in the secured transaction game.”
Key points to remember:
Two main methods of perfection: filing and possession/control.
Filing is done with the secretary of state.
The financing statement must identify both the collateral and the security interest.
Possession or control is an alternative to filing for certain types of collateral.
Common ways this might be tested:
Questions about how to perfect a security interest in different types of collateral.
Fact patterns where you need to determine if a security interest has been properly perfected.
Scenarios comparing different methods of perfection.
Common mistakes to avoid:
Forgetting that perfection is separate from attachment.
Assuming all types of collateral can be perfected by filing.
Overlooking the requirement to identify both the collateral and the security interest in the financing statement.
To reinforce your memory:
Create a flowchart showing the two main paths to perfection.
Practice explaining the difference between filing and possession/control methods of perfection.
Review examples of financing statements and identify how they meet the perfection requirements.
This rule is crucial for understanding how security interests are made effective against third parties. It emphasizes that while filing is a common method of perfection, it’s not the only one, and that the method of perfection can depend on the type of collateral involved.
Remember that perfection is a step beyond attachment and is necessary to establish priority against other creditors or in bankruptcy proceedings. The choice between filing and possession/control can have significant implications for the secured party’s rights and the practical aspects of the transaction.
Financing Statement Requirements
2BE FSMSCWFR
PNOD&SPIORNIDIO
ICC
BFBPABD2FFS
NSPCCAF
Rule Statement:
To be effective, the financing statement must substantially comply with the following requirements:
provide the name of the debtor and the secured party, including the official registered name if debtor is an organization;
indicate the collateral covered; and
be filed by a person authorized by the debtor to file the financing statement.
To help memorize this important point, consider the following techniques:
Mnemonic: “NSCCAF” (Names, Secured party, Collateral, Covered, Authorized, Filed)
Visualization: Picture a document with three sections: at the top are two name tags (debtor and secured party), in the middle is a list of items (collateral), and at the bottom is a stamp saying “Authorized” and “Filed.”
Rhyme: “Names of debtor and secured, collateral clearly assured. Authorized and duly filed, these make a statement that’s well-styled.”
Key points to remember:
Three main requirements for an effective financing statement.
Importance of correct names, especially for organizational debtors.
Need to indicate collateral covered.
Requirement for authorization to file.
Common ways this might be tested:
Fact patterns where you need to determine if a financing statement is effective.
Questions about what information must be included in a financing statement.
Scenarios involving errors or omissions in financing statements.
Common mistakes to avoid:
Forgetting to use the official registered name for organizational debtors.
Providing an overly vague description of collateral.
Overlooking the need for authorization to file.
To reinforce your memory:
Create a checklist of the requirements for an effective financing statement.
Practice drafting sample financing statements for different scenarios.
Review examples of defective financing statements and identify why they’re ineffective.
This rule is crucial for understanding how to properly perfect a security interest through filing. It emphasizes the importance of accuracy in identifying the parties and collateral, as well as the need for proper authorization.
Remember that “substantial compliance” means that minor errors won’t necessarily invalidate the financing statement, as long as it’s not seriously misleading. However, it’s always best to aim for full compliance to avoid any potential issues.
The requirement for using the official registered name of organizational debtors is particularly important, as errors in the debtor’s name can make the financing statement seriously misleading and thus ineffective.
The authorization requirement helps prevent unauthorized filings, which could otherwise be used to harass debtors or create confusion in the public record.
Priority of Security Interests
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Rule Statement:
Between perfected security interests, the first creditor to perfect its interest has priority. This is the “first in time, first in right” rule.
A perfected security interest has priority over unperfected security interests.
Between unperfected security interests, the first creditor to attach has priority.
To help memorize this important point, consider the following techniques:
Mnemonic: “FPPP-POU-FAU” (First Perfect Priority Perfected, Perfected Over Unperfected, First Attach Unperfected)
Visualization: Picture a race track with three lanes. In the top lane (perfected interests), the first runner wins. In the middle lane (perfected vs. unperfected), the perfected runner always wins. In the bottom lane (unperfected interests), the first to start running wins.
Rhyme: “First to perfect takes the lead, over unperfected it will succeed. When none perfect, first to attach, that’s the one that makes the catch.”
Key points to remember:
Priority between perfected interests is determined by timing of perfection.
Perfected interests always beat unperfected interests.
Between unperfected interests, priority is determined by timing of attachment.
Common ways this might be tested:
Fact patterns involving multiple creditors with security interests in the same collateral.
Questions about how to determine priority between different types of security interests.
Scenarios involving a mix of perfected and unperfected security interests.
Common mistakes to avoid:
Confusing the rules for perfected and unperfected interests.
Forgetting that perfection, not attachment, determines priority among perfected interests.
Assuming that earlier attachment always gives priority.
To reinforce your memory:
Create a flowchart showing the steps to determine priority in different scenarios.
Practice explaining the priority rules to someone else, using examples.
Review sample problems involving multiple security interests and determine their priority.
This rule is crucial for understanding how conflicts between competing security interests are resolved. It emphasizes the importance of both perfection and timing in securing priority.
Remember that these are general rules and there can be exceptions, such as purchase money security interests or specific rules for certain types of collateral. However, these basic principles form the foundation for understanding priority in secured transactions.
The “first in time, first in right” rule for perfected interests encourages creditors to perfect their interests promptly. The rule giving perfected interests priority over unperfected interests incentivizes creditors to take the extra step of perfection. The rule for unperfected interests falling back on attachment timing serves as a tiebreaker when neither party has perfected.
Understanding these priority rules is essential for advising clients on how to protect their interests in secured transactions and for resolving disputes between competing creditors.
Purchase Money Security Interests
PMSI IC W CEV2D 4POED2QRIC
CEVDACAPCF20DD
Rule Statement:
A purchase money security interest (PMSI) is created when a creditor extends value to the debtor for the purpose of enabling the debtor to acquire rights in the collateral.
A PMSI in consumer goods is automatically perfected.
To perfect a PMSI in non-consumer goods, the creditor must file a financing statement within 20 days after the debtor receives delivery of the collateral.
To help memorize this important point, consider the following techniques:
Mnemonic: “CEVDAC-APC-F20D” (Creditor Extends Value, Debtor Acquires Collateral - Automatic Perfection Consumer - File 20 Days Delivery)
Visualization: Picture a store owner (creditor) handing money to a customer (debtor) who then receives a product (collateral). For consumer goods, imagine a stamp that says “Auto Perfect” appearing. For non-consumer goods, picture a clock counting down 20 days and a document being filed.
Rhyme: “Credit given, rights acquired, that’s how PMSI is inspired. Consumer goods perfect on sight, others need filing done right. Twenty days from delivery, file to maintain priority.”
Key points to remember:
Definition of PMSI involves creditor enabling debtor to acquire collateral.
PMSIs in consumer goods are automatically perfected.
PMSIs in non-consumer goods require filing within 20 days of delivery.
Common ways this might be tested:
Fact patterns involving the purchase of goods with credit.
Questions about how to perfect a PMSI in different types of goods.
Scenarios involving timing issues for perfecting PMSIs.
Common mistakes to avoid:
Confusing the rules for consumer and non-consumer goods.
Forgetting the 20-day deadline for filing for non-consumer goods.
Assuming all PMSIs are automatically perfected.
To reinforce your memory:
Create a flowchart showing the steps to create and perfect a PMSI for different types of goods.
Practice explaining the difference between consumer and non-consumer goods PMSIs.
Review sample problems involving PMSIs and determine if they’re properly created and perfected.
This rule is crucial for understanding a special type of security interest that often receives priority over other security interests. PMSIs are important because they enable debtors to acquire new assets and provide creditors with a strong security position.
Remember that the automatic perfection of PMSIs in consumer goods is an exception to the general rule requiring some action (like filing) for perfection. This exception is designed to facilitate common consumer transactions.
The 20-day grace period for filing for non-consumer goods PMSIs allows creditors to deliver the goods immediately while still having time to perfect their interest. This balance between commercial efficiency and secured creditor protection is a key feature of PMSI rules.
Understanding PMSIs is essential for advising clients involved in sales or financing of goods, as well as for analyzing priority disputes involving newly acquired collateral.
Buyers in the Ordinary Course of Business
ABIOCTFOSI
ABIOCOBIAP
WBGIGF
WOKTSVROAP
MPIOCFM
FREE OF SI GF K OC PFM
Rule Statement:
A buyer in the ordinary course takes free of security interests.
A buyer in the ordinary course of business is a person:
who buys goods in good faith,
without knowledge that the sale violates the rights of another person, and
makes the purchase in the ordinary course from a merchant.
To help memorize this important point, consider the following techniques:
Mnemonic: “FREE-GKO-POM” (FREE of security interests, Good faith, Knowledge, Ordinary course, Purchase from Merchant)
Visualization: Picture a shopper (buyer) in a store (merchant) with a “FREE” tag on their purchase, surrounded by a shield labeled “Good Faith” and wearing blindfold labeled “No Knowledge,” while walking on a path marked “Ordinary Course.”
Rhyme: “In good faith and unaware, from a merchant’s ordinary wares, the buyer takes without a care, free from interests others bear.”
Key points to remember:
Buyers in ordinary course take free of security interests.
Three main requirements: good faith, lack of knowledge, and ordinary course purchase from a merchant.
This rule protects normal commercial transactions.
Common ways this might be tested:
Fact patterns involving purchases from businesses with existing security interests.
Questions about what qualifies as a purchase in the ordinary course.
Scenarios testing the limits of “good faith” and “without knowledge.”
Common mistakes to avoid:
Forgetting that the purchase must be from a merchant.
Assuming all purchases automatically qualify as “in the ordinary course.”
Overlooking the good faith requirement.
To reinforce your memory:
Create a checklist of the requirements for a buyer in the ordinary course.
Practice explaining the concept using everyday examples (like buying from a retail store).
Review sample problems involving buyers and determine if they qualify as buyers in the ordinary course.
This rule is crucial for understanding how security interests interact with everyday commercial transactions. It balances the interests of secured creditors with the need for efficient commerce.
Remember that this rule primarily applies to inventory sold by merchants. It allows businesses to sell their inventory free of security interests, which is essential for normal business operations.
The “good faith” and “without knowledge” requirements ensure that buyers can’t take advantage of this rule if they know they’re participating in a transaction that violates someone else’s rights.
The “ordinary course” requirement helps distinguish between normal business transactions and unusual deals that might warrant more scrutiny.
Understanding this concept is essential for advising both businesses and consumers about their rights in everyday transactions, as well as for analyzing priority disputes involving sold goods.
Equipment
EIGOT I FP OR CG
Rule Statement:
“Equipment” is goods other than inventory, farm products, or consumer goods.
To help memorize this important point, consider the following techniques:
Mnemonic: “GIFT” (Goods, Inventory, Farm products, conSumer goods - Equipment is what’s left)
Visualization: Picture a factory with various machines (equipment) surrounded by three labeled boxes: “Inventory,” “Farm Products,” and “Consumer Goods.” The equipment is clearly separate from these boxes.
Rhyme: “If it’s not for sale, farm, or home, equipment’s what you own.”
Key points to remember:
Equipment is a category of goods under the UCC.
It’s defined by exclusion - what it’s not, rather than what it is.
The other main categories of goods are inventory, farm products, and consumer goods.
Common ways this might be tested:
Fact patterns asking you to categorize various types of goods.
Questions about how to determine if something qualifies as equipment.
Scenarios involving businesses with different types of assets.
Common mistakes to avoid:
Assuming all business assets are equipment.
Forgetting that farm products are a separate category.
Confusing equipment with inventory in a business context.
To reinforce your memory:
Create a Venn diagram with four circles: equipment, inventory, farm products, and consumer goods.
Practice categorizing different items into these four categories.
Review examples of business assets and determine which would qualify as equipment.
This definition is crucial for understanding how different types of goods are treated under secured transactions law. The categorization of goods can affect perfection requirements, priority rules, and other aspects of security interests.
Remember that equipment typically includes things used in a business that are not held for sale (inventory), not used in farming (farm products), and not used for personal purposes (consumer goods). Common examples might include office furniture, manufacturing machinery, or vehicles used in business operations.
The distinction between equipment and inventory can sometimes be subtle, especially for businesses that both use and sell similar items. The key is usually the primary purpose for which the goods are held.
Understanding this definition is essential for properly categorizing collateral in security agreements and financing statements, as well as for determining the appropriate rules to apply in secured transactions involving different types of goods.
Goods
GAATMWSIA IFTUYOAC&MF
MATOA+TUAC
Rule Statement:
“Goods” are all things movable when the security interest attaches (including fixtures, timber, unborn young of animals, crops, and manufactured homes).
To help memorize this important point, consider the following techniques:
Mnemonic: “MATTUC” (Movable At Time of attachment, plus Timber, Unborn animals, Crops)
Visualization: Picture a moving truck filled with various items (representing movable things), with trees (timber), pregnant animals, fields of crops, and a manufactured home all being loaded into it at the moment a lock (representing the security interest) clicks shut.
Rhyme: “If it moves when interest sticks, it’s goods - from homes to chicks. Timber, crops, and fixtures too, all count as goods under UCC’s view.”
Key points to remember:
Goods must be movable at the time of attachment.
The definition includes some items that might not seem “movable” in the conventional sense.
The timing of movability is crucial - it’s when the security interest attaches.
Common ways this might be tested:
Fact patterns involving various types of property, asking you to determine which qualify as “goods.”
Questions about whether certain borderline items (like fixtures or unborn animals) count as goods.
Scenarios testing the timing of when something becomes a “good” for UCC purposes.
Common mistakes to avoid:
Forgetting that fixtures can be considered goods.
Assuming that all real estate-related items are excluded from goods.
Overlooking the importance of timing in determining what qualifies as a good.
To reinforce your memory:
Create a list of examples for each category of goods mentioned in the definition.
Practice explaining why each of the specific inclusions (fixtures, timber, etc.) is important.
Review scenarios involving different types of property and determine whether they would qualify as goods under this definition.
This definition is crucial for understanding the scope of Article 9 of the UCC, which governs secured transactions involving goods. The broad definition ensures that a wide range of property can be used as collateral.
Remember that the inclusion of items like fixtures and timber bridges the gap between personal property and real property, allowing certain attached or growing things to be treated as goods for secured transactions purposes.
The inclusion of unborn young of animals and growing crops allows for the creation of security interests in future property, which can be important in agricultural financing.
Understanding this definition is essential for properly identifying what can be used as collateral in a secured transaction, drafting accurate security agreements and financing statements, and determining which rules apply to different types of property.
Perfected Security Interests
CASINPPIP
Rule Statement:
A security interest will continue following sale, lease, or other disposition of the collateral unless the secured party authorizes a transfer free of the security interest.
Perfected security interests attach to any identifiable proceeds from the sale or disposition of the collateral, but that interest will become unperfected on the 21st day after attachment unless
a) proceeds are identifiable cash proceeds;
b) security interest is perfected when it attaches to the proceeds or within 20 days; or
c) if all of the following are satisfied: i) original collateral was perfected under the general filing rule; (ii) proceeds are collateral that may be perfected by filing; and (iii) proceeds are not acquired with cash proceeds.
To help memorize this important point, consider the following techniques:
Mnemonic: “CASIP” (Continue After Sale If not Permitted, Proceeds Interest Perfected)
Visualization: Picture a chain (security interest) attached to an object (collateral) that transforms into money or other goods (proceeds). The chain remains unless cut by scissors labeled “Authorization.”
Rhyme: “Interest follows through the sale, unless permission sets it free. Proceeds keep the interest strong, for twenty days it will prolong. Cash, quick filing, or right type, keep perfection day and night.”
Key points to remember:
Security interests generally survive disposition of collateral.
Secured parties can authorize transfers free of the security interest.
Perfected interests attach to identifiable proceeds.
There’s a 21-day grace period for maintaining perfection in proceeds.
Three ways to maintain perfection in proceeds beyond 21 days.
Common ways this might be tested:
Fact patterns involving the sale of collateral and tracing of proceeds.
Questions about when a security interest continues or terminates after disposition.
Scenarios testing the limits of the 21-day rule for proceeds.
Common mistakes to avoid:
Assuming all sales terminate security interests.
Forgetting the 21-day limitation on automatic perfection in proceeds.
Overlooking the different rules for cash proceeds vs. other types of proceeds.
To reinforce your memory:
Create a flowchart showing what happens to a security interest after disposition of collateral.
Practice explaining the rules for proceeds to someone else, using examples.
Review sample problems involving sales of collateral and tracing of proceeds.
This rule is crucial for understanding how security interests persist through changes in the collateral. It balances the interests of secured creditors with the need for free alienability of property.
Remember that the continuation of security interests in proceeds is a key feature that protects creditors when collateral is sold or transformed. The 21-day rule provides a grace period for creditors to take action to maintain perfection.
The different treatment of cash proceeds recognizes their special nature and the difficulty of tracing them.
Understanding these rules is essential for advising clients on how to maintain their security interests, drafting appropriate security agreements, and resolving disputes involving sold collateral or proceeds.
Proceeds
PAP AU S L OR DOC C OR DOAOC RAOOF CAOOL N D OR IWUOC OR IPBLOC
SLACCRID
Rule Statement:
“Proceeds” are property a) acquired upon the sale, lease, or other disposition of collateral; b) collected or distributed on account of collateral; c) rights arising out of collateral; d) claims arising out of the loss, nonconformity, defect, or interference with the use of collateral; or e) insurance payable by loss of collateral.
To help memorize this important point, consider the following techniques:
Mnemonic: “SACRED” (Sale/lease, Account collections, Claims, Rights, Insurance, Distributions)
Visualization: Picture a flow chart starting with an object (collateral) branching out into money from sales, checks from collections, legal documents (rights and claims), and an insurance policy.
Rhyme: “From sale, lease, or disposition, collections and distribution, rights and claims from loss or flaw, insurance pay when accidents draw. These are proceeds, remember well, in secured transactions they do tell.”
Key points to remember:
Proceeds can come from disposition of collateral (sale, lease, etc.)
Collections or distributions from collateral count as proceeds
Rights and claims related to collateral are proceeds
Insurance payments for loss of collateral are proceeds
Common ways this might be tested:
Fact patterns asking you to identify what qualifies as proceeds
Questions about whether certain types of property or payments are proceeds
Scenarios involving transformations or dispositions of collateral
Common mistakes to avoid:
Forgetting that leases can generate proceeds
Overlooking non-monetary proceeds like rights or claims
Assuming only sale-related income counts as proceeds
To reinforce your memory:
Create a mind map with “Proceeds” at the center and branches for each category
Practice identifying proceeds in various business scenarios
Review examples of each type of proceed and explain why they qualify
This definition is crucial for understanding how security interests can extend beyond the original collateral. It ensures that secured parties maintain their interest even when the collateral changes form or generates income.
Remember that the broad definition of proceeds protects secured creditors in various scenarios, not just outright sales. This includes situations where the collateral generates income (like rent from leased equipment) or where the collateral is damaged or destroyed (leading to insurance payouts or legal claims).
The inclusion of rights and claims as proceeds is particularly important, as it allows the security interest to attach to intangible assets that may arise from the collateral.
Understanding this definition is essential for properly tracking and claiming proceeds, drafting comprehensive security agreements, and resolving disputes over what property is covered by a security interest after the original collateral has been transformed or disposed of.
